NCLAT Invokes Equity To Close CIRP In Procedural Stalemate

The National Company Law Appellate Tribunal (NCLAT) has terminated insolvency proceedings against a viable corporate entity, ruling that the hyper-technical procedural requirements for withdrawal under Section 12A of the Insolvency and Bankruptcy Code, 2016 cannot be allowed to perpetuate a legal stalemate when all creditors have been settled and no resolution plan is in sight. In a decisive move to prevent the wastage of judicial resources, the Tribunal exercised its appellate powers to bypass the rigid bank guarantee requirements of the CIRP Regulations, prioritizing the functional objective of the law over mechanical adherence to Form FA.

A Principal Bench comprising Justice Mohammad Faiz Alam Khan (Judicial Member), Mr. Arun Baroka (Technical Member), and Mr. Indevar Pandey (Technical Member) heard an appeal filed by the suspended director of Shalfeyo Industries Private Limited. The Appellant challenged an order passed by the National Company Law Tribunal (NCLT), Jaipur Bench, which had strictly refused to allow the withdrawal of the Corporate Insolvency Resolution Process (CIRP) despite the discharge of all substantial liabilities.

Key Takeaways

Substance Over Form in CIRP Withdrawal

Where a Corporate Debtor is a viable entity and all creditors are settled, procedural non-compliance in Section 12A filings will not be a bar to closing the CIRP.

Priority of Commercial Settlement

Judicial intervention is warranted to break deadlocks caused by disputes over CIRP costs and Resolution Professional fees when the primary insolvency is resolved.

Protection of Viable Entities

Keeping a viable company under CIRP solely due to procedural bottlenecks violates the core objective of the IBC to maintain the company as a going concern.

Court Observations and Directions

The Tribunal scrutinized the peculiar circumstances where the sole Financial Creditor, Axis Bank, had been paid in full, and the Operational Creditor had reached a settlement. The Court noted that the CIRP Regulations requirement for a bank guarantee towards CIRP costs was not feasible because the costs were not yet crystallized and were under dispute before the Adjudicating Authority.

The Court, in its reasoning, observed: "Keeping the CIRP alive is not serving any purpose nor it would be in accordance with the objectives of the Code which seeks to resolve the insolvency and keep it as a going concern. We are of the view that, the company is a viable entity and keeping the CIRP alive merely because the earlier statutory withdrawal mechanism could not be completed, would be huge wastage of precious resources in terms of time of Tribunals which could be productively used to dispose other important proceedings."

Regarding the rejection by the Adjudicating Authority based on the precedent in Glass Trust Company LLC v/s Byju Raveendran and Others ( "2024 SCC OnLine SC 3032": 2024 CaseBase(SC) 798), the NCLAT found that while statutory procedures are mandatory, they cannot be used to sustain a stalemate that serves no insolvency-resolution purpose. The Court has following directions:

"(i) The CIRP Proceedings against the Corporate Debtor/ Shalfeyo Industries Pvt. Ltd. are closed subject to the condition that as per the undertaking, the Appellant would pay Rs.18 lakhs to Respondent No.3/ Prime Impex within two weeks of this order as full and final settlement;

(ii) Ld. Adjudicating Authority to determine the CIRP costs in IA No. 160/2023 within four weeks from the receipt of this order, after considering the claim of the Resolution Professional and the submission of the Appellant; and

(iii) The Appellant would pay the CIRP costs as determined by the Ld. Adjudicating Authority within two weeks from the order."

Ratio

When the underlying debt of all creditors is fully satisfied and the CIRP reaches a procedural stalemate due to uncrystallised costs or refusal of the applicant to provide a bank guarantee under Regulation 30A, the Appellate Tribunal may exercise its powers to close the CIRP to fulfill the IBC's objective of preserving a viable corporate entity as a going concern.

Background

The insolvency process was triggered on August 16, 2022, by Prime Impex (Operational Creditor) over a claim of approximately Rs. 11.90 Lakhs. Axis Bank, the sole Financial Creditor, initially had a claim of Rs. 1.04 Crore but eventually withdrew from the CoC after the Appellant (suspended director) settled the dues through personal funds and collateral sale.

Despite the settlement, a deadlock arose when the Resolution Professional (RP) claimed CIRP costs of approximately Rs. 35 lakhs. The Operational Creditor refused to sign Form FA for withdrawal as it required a bank guarantee for these disputed costs. The Adjudicating Authority, relying on Glass Trust Company LLC v/s Byju Raveendran and Others ( "2024 SCC OnLine SC 3032": 2024 CaseBase(SC) 798), dismissed the withdrawal application filed directly by the suspended director, citing that it must be filed through the RP and meet the 90% CoC voting requirement. The NCLAT, however, found that since the Financial Creditor was settled and the Operational Creditor agreed to a final settlement of Rs. 18 lakhs, the procedural requirements of Section 12A of Insolvency and Bankruptcy Code, 2016 and Regulation 30A of CIRP Regulations were no longer feasible and set aside the rigid adherence to them.

Case Details:
Case No.: Company Appeal (AT) (Ins.) No. 222 of 2025
Case Title: Deepak Modi Vs. Shalfeyo Industries Private Limited & Ors.
Appearances:
For the Petitioner(s): Mr. Sandeep Bajaj, Advocate.
For the Respondent(s): Mr. Anupam Singh and Mr. Roshini Nathwani, Advocates.

Source: 2026 CaseBase(NCLAT) 28